Getting 7% Handle on Unemployment Is/Isn't Done Deal Just in Time for 2012

By Rich Miller -
Mar 1, 2011

Unemployment may fall faster than
both the Federal Reserve and the White House project as an aging
population holds down the supply of workers and an expanding
economy increases the demand.

The jobless rate will drop to near 7 percent by the end of
2012 from 9 percent in January, according to two former Fed
officials, Peter Hooper and Neal Soss, now chief economist for
Credit Suisse Holdings USA Inc in New York. The White House
forecasts an 8.2 percent rate in the fourth quarter of next
year, while Fed policy makers foresee a range of 7.6 percent to
8.1 percent.

“There will be a significant tightening of the labor
market in the years ahead,” said Hooper, New York-based chief
economist for Deutsche Bank Securities Inc. He said payrolls
will soon start growing at a monthly clip of 200,000 to 300,000,
compared with last year’s average monthly pace of 75,750.

A faster-than-forecast decline in unemployment during the
next two years might be good for President Barack Obama’s re-
election prospects and bad for Treasury bonds. Hooper sees the
yield on the 10-year Treasury note rising to 4 percent by the
end of this year and 5 percent by the end of 2012 as the Fed
responds to falling unemployment and rising inflation by
tightening credit. The yield stood at 3.4 percent at 5:01 p.m.
in New York, according to BGCantor Market Data.

Obama will get the credit if growth accelerates and
unemployment plunges ahead of the November 2012 presidential
election, said John Fortier, a research fellow at the American
Enterprise Institute in Washington.

The jobless rate probably rose to 9.1 percent in February,
according to the median forecast in a Bloomberg News survey of
economists ahead of the March 4 Labor Department report. The
rate fell to 9 percent in January from 9.8 percent in November,
the biggest two-month decline since 1958. Payrolls likely rose
by 193,000 last month, the survey showed.

Seeking Work

New York Fed President William Dudley said the drop in
unemployment in the last few months reflected both an increase
in hiring and a contraction in the labor force. The
participation rate -- the proportion of Americans aged 16 and
over who are working or seeking work -- was 64.2 percent in
January, the lowest in almost 27 years, compared with 65.7
percent at the end of the last recession in June 2009.

“The key question is whether this decline is due to
cyclical or structural forces,” Sven Jari Stehn, an economist
with Goldman Sachs Group Inc. in New York, wrote in a Feb. 11
report.

If it’s the former, the participation rate should rise as
the expanding economy entices discouraged workers back into the labor force. That would slow the forecasted fall in joblessness.

If it’s the latter, the participation rate may not increase
much, if at all, and could even decline, accelerating any drop
in the jobless rate.

The fundamental, long-term dynamic at work is the aging of
America. As workers get older, they’re more likely to retire and
drop out of the labor force. The Census Bureau projects that the
proportion of Americans 65 years and older will rise to 18.3
percent of the working-age population in 2015 from 16.5 percent
in 2010.

Staying in School

Other trends are in place as well. Young Americans are
opting to stay in school longer, delaying the start of their
working years. Female participation has crested. After rising to
a high of 60.3 percent in April 2000 from 32 percent at the
start of 1948, it fell to 58.3 percent in January of this year,
according to the Labor Department.

Such long-term influences account for the bulk of the
decline in the participation rate during the past few years,
according to Stehn. He forecasts that the rate will rise only
modestly as the economy strengthens, to 64.7 percent by the end
of 2012, allowing unemployment to fall to 8 percent by then.

Soss sees no net rise in participation in the next two
years and predicts the unemployment rate will be in “the low
7’s” by the end of 2012. In the two years before the recession
began in December 2007, joblessness remained below 5 percent for
24 consecutive months.

Consensus Forecast

Most forecasters don’t see unemployment falling as far as
Soss and Hooper do. The rate will average 8.3 percent in the
fourth quarter of 2012, according to the consensus of 52
economists surveyed last month by Blue Chip Economic Indicators.

The rate will rebound to 9.4 percent in the second quarter
of this year as workers re-enter the labor force, before falling
to 8.6 percent in the final three months of 2012, said Edward Leamer, a professor at the University of California at Los
Angeles and director of UCLA Anderson Forecast.

David Rosenberg, chief economist at Gluskin Sheff &
Associates in Toronto, is even more pessimistic. He sees the
unemployment rate rising to an average of 9.5 percent in the
fourth quarter of this year and 10 percent in the final three
months of 2012 as the economic expansion falters. Payroll gains
“will be averaging something close to 100,000 per month this
year,” he added in an e-mail.

Increased Efficiency

Companies so far have responded to increased demand for
their products and services by getting more out of their
existing workers through longer hours and increased efficiency.
There is a limit, though, to how far that can go, Hooper said.

Home Depot Inc., the world’s largest home-improvement
retailer, last month said it is hiring more than 60,000
temporary workers in the U.S., as well as adding permanent
employees for the second year in a row. The Atlanta-based
company is boosting staff as it prepares for the biggest selling
season of the year, March through mid-June, Craig Menear,
executive vice president of merchandising, said in a telephone
interview Feb. 14.

Intel Corp., the world’s biggest chipmaker, announced Feb.
18 it plans to build a $5 billion microprocessor plant in Arizona and hire 4,000 employees in the U.S. this year. The
workers will focus on product development, research and design,
Chief Executive Officer Paul Otellini said.

Rising Hours

Average weekly working hours for private-sector employees
rose in February to 34.3 from 34.2 in January and 33.8 at the
start of the recovery, according to the median forecast of
economists polled by Bloomberg. That would bring hours worked in
line with the average of the past five years.

Productivity growth, meanwhile, slowed to a year-over-year
rate of 1.7 percent in the fourth quarter of 2010 from 2.6
percent in the third quarter and a 49-year high of 6.3 percent
in the first three months of last year, according to Labor
Department data. Hooper forecasts it will settle at 1.5 percent
in the next four years.

He compares the outlook for bonds to 1994. Treasuries lost
3.3 percent that year, according to data from Bank of America-
Merrill Lynch & Co., as the Fed was in the process of doubling
short-term rates to 6 percent to keep inflation in check. The
jobless rate fell to 5.5 percent in December 1994 from 6.5
percent a year earlier.

Potential for ‘Selloff’

“The potential for a selloff this time around is
substantially greater than we had in 1994,” Hooper said.

For the American Enterprise Institute’s Fortier, the
comparison could end up being with 1984. The late President Ronald Reagan swept to re-election that year after the jobless
rate fell to 7.2 percent in November 1984 from the post-World
War II high of 10.8 percent in 1982.

If unemployment again falls that quickly, Obama will be one
who benefits, Fortier said. “It will be very hard to beat an
incumbent president if we have a very good economy,” he said.